About Norfolk Southern
Chugga-chugga chugga-chugga choo-choo!
No, that’s not the money train rolling through your town, that’s Norfolk Southern.
Or at least, that’s the name of the company we will be performing an in-depth stock and company analysis on in this article!
Ok, cool, Norfolk Southern is a rail company that as Dwight Schrute might say, “hauls cube.” More specifically, the company is one of America’s leading transport companies based in where else but Norfolk, Virginia.
The company is a relatively new railroad (at least, compared to its peers), founded in 1990. According to their website, Norfolk Southern operates primarily on the east coast of the United States, stretching out as far due west as Kansas City, Missouri and as southwest as Dallas, Texas.
At the end of the day, Norfolk Southern is a veteran railroad company with a super cool looking horse as its logo.
We don’t feel the need to bore you with much more general information about the company. Let’s take a dive into Norfolk Southern’s financials and see if you should consider adding the company to your watchlist and, possibly, to your investment portfolio.
Norfolk Southern’s stock numbers
As of this writing, the company has a market capitalization of just north of $68 billion, an annual dividend of $4.96 and a price to earnings (P/E) ratio of 21.70.
Let’s break this down a little bit.
A company’s market capitalization is generally defined as a company’s worth according to the stock market. Specifically, market capitalization is calculated by multiplying the number of shares outstanding and the company’s current share price. Therefore, the more people pick up shares of Norfolk Southern, the higher the market capitalization. Also, the more the company’s share price rises, the higher the market capitalization as well.
Personally, I don’t give much credence to this metric mainly because you typically know which companies are big and which are not. Additionally, sheer size of a company isn’t necessarily as important as the company’s financials and other metrics that paint a clearer picture of the company and its ability to make money.
As it relates to the company’s dividend, the dividend lovers of the world must be salivating at Norfolk Southern’s healthy annual dividend of nearly $5.
Finally, the company’s current P/E ratio of 22.26 means Norfolk Southern’s stock price is ever-so-slightly overvalued at its current share price of around $258.
This isn’t a huge concern given that many companies, transportation sector included, are trading at ridiculously high valuations likely pushed by the world’s overall demand for shipped goods and products.
Norfolk Southern isn’t looking too bad so far! However, let’s get a little more familiar with the company’s fundamentals and financial statements.
Norfolk Southern’s stock financials
Norfolk Southern has both a boring and stellar balance sheet, similar to many of its fellow publicly traded industry peers such as Union Pacific (NYSE: UNP) and CSX (NASDAQ: CSX).
We’re glad there weren’t any major balance sheet surprises. As we firmly believe at MacroHint, slow and steady (and stable) wins the stock market race!
But don’t believe it just because we said it—see the numbers for yourselves.
Specifically, Norfolk Southern oversees (as of the last report in December 2021) around $40.5 billion in total assets and slightly more than $27 billion in total liabilities. The relatively large amount of total liabilities that is common for the major aforementioned railroad companies can likely be attributed to one word: operations.
Locomotives, freight cars and employee pension plans. These are just some of the assets and liabilities these companies have to juggle and maintain over long periods of time. Similar to many of its peers, the company will likely not have an issue paying down its long term-debt and other liabilities over time. However, let’s not assume. Let’s get a better idea of how good Norfolk Southern is at making money!
For starters, as we move over to the company’s income statement, between 2017 and 2021 their total revenue has been pretty flat. For instance, in 2017 the company’s total revenue stood at roughly $10.5 billion and crept up to about $11.1 billion in 2021. Between that time, their total revenue stayed in the $11 billion area, however, it did creep down to approximately $9.7 billion in 2020 which could be attributed to rising costs paired with increased demand during the recent brunt of the supply chain mayhem.
I like the historic steadiness and stability of Norfolk Southern’s finances so far. As a long-term investor, I don’t need the company’s stock to quadruple my trading account within the next month. Instead, I prefer the company provide a solid annual dividend, general increase in share price over the next decade, and management to keep the company financially strong and equipped for whatever the future has to offer.
From my team’s perspective, this is what you get with Norfolk Southern’s stock so far.
But now is no time to celebrate—let’s keep investigating!
Onto the company’s cash flow statement, something interesting has happened.
In 2017, Norfolk Southern’s net income was around $5.4 billion. In all years following, their net income dropped and stayed around $2-3 billion.
What is causing this?
The typical causes of a decrease in net income can stem from a decrease in “lower sales, higher expenses or a combination of both,” according to sources.
According to the total revenues we’ve just discussed, sales (revenue) don’t appear to be a problem for Norfolk Southern. Since these numbers imply that the company’s revenue is steady, increased expenses might be eating away at the company’s net income.
Let’s keep in mind that there are a lot of costs such as fuel and maintenance (among others) that railway companies such as Norfolk Southern have to constantly manage. Ultimately, what matters is whether or not these increased expenses are out of Norfolk’s control or not.
According to the data and other companies’ comparable numbers, it doesn’t appear to be a Norfolk problem, but more so an industry wide problem.
For instance, looking at the other aforementioned freight rail companies’ cash flow statements, their net income has also dropped almost proportionately to the drop Norfolk has seen.
What’s specifically going on here?
Norfolk Southern’s fuel costs and other expenses
It could be a number of factors such as an increase in fuel prices, an increased cost of transporting goods and freight across the country and/or other higher expenses that are keeping their net income at lower levels.
As of right now, I am somewhat comforted as an investor doing my due diligence on Norfolk Southern. Specifically, it doesn’t appear that Norfolk Southern’s net income dropped off and all other major railroad companies’ net income has stayed steady.
However, while Norfolk Southern is in the clear and our team of analysts won’t hold their net income against them, it must be understood that the railroad industry is a tough one, full of many variable costs. This being the case, investors considering putting their money into a rail company’s stock should be like a Norfolk Southern locomotive lugging freight between Pennsylvania and Florida; in it for the long haul.
Ultimately, neither you nor the executives at the companies have full bearing or control over these costs; it’s just a price to pay when you invest in this type of industry.
Norfolk Southern’s profitability
After discussing the industry’s general net income and the type of mindset investors should have when looking at rail transport companies, let’s get back to analyzing Norfolk Southern specifically.
In terms of churning out a profit, Norfolk Southern gets the job done.
Specifically, the company maintains an annual operating profit margin far above that of the industry. Additionally, Norfolk’s annual net profit margin stands at nearly 27% compared to the industry’s -35.78%, according to TD Ameritrade’s platform.
However, as we like to say at MacroHint, what’s the sweet without the bitter?
While profitability doesn’t seem to be a problem for Norfolk Southern, their growth rate figures are pretty low. Usually, this isn’t a major point of concern for our team, especially given that the company has been around for a while and holds a dominant industry position. However, Norfolk Southern’s annual revenue growth is considerably less than the industry.
Norfolk’s annual revenue growth stands at nearly 14% to the industry’s nearly 30%.
As long as revenue is generally trending upwards, our team doesn’t have any major problems or gripes with a company as established as Norfolk Southern. However, we do hope to see some intermediate to long-term growth in revenue.
Again, this isn’t a major point of worry for us, however their revenue growth does seem pretty low.
Now, is Norfolk Southern generating solid returns on their investments?
It appears so!
For example, the company’s annual return on assets is basically in line with the industry (nothing wrong with that, especially in the rail transport industry), their annual return on equity is slightly above the industry and their annual return on investment is nearly the same as the industry as well.
Nothing to write home about, but consistent.
In a VUCA world, filled with volatility, uncertainty, complexity and ambiguity, it is better to have solid and stable returns as opposed to sporadic, unpredictable returns.
My goal as an investor isn’t to be on my computer constantly worrying about a percentage point up or getting clobbered on the downside. It’s to have my invested capital produce predictable returns over time.
So, the moral of the story is to not hate on consistency.
Should you buy Norfolk Southern stock?
Although the freight transport industry is somewhat volatile, especially amidst the supply chain mayhem that peaked in 2021, Norfolk Southern has delivered. The company’s financials are stable, strong and the company is likely able to overcome any supply chain-related challenges the industry is likely to face in the future.
We give the company a “hold” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.